Debt-Service Coverage Ratio Loans – Your Guide to Applying One
Businesses in every known industry, whether big or small, need capital to operate.
This working capital serves as a bloodline that enables any business establishment to continuously steer towards reaching its goal.
A goal that most often includes gaining profit. Without this capital, an organization or a simple business will lose steam and eventually close.
When it comes to finding capital through business financing, borrowing from banks or lending companies is the usual route.
One might argue that borrowing or taking a loan would be a misstep for a business especially if the interest to be incurred is high.
But in truth, business financing through loan is a common practice that even huge and successful corporations do.
Even in real estate and mortgaging, financing is a very huge factor. If you are struggling to pay your mortgage or want to broaden your property portfolio, you are probably in need of some financing help.
But applying for a regular loan from a bank could take many days and even months.
There are many paperwork and processes that you have to undergo with a very low chance of approval.
What is a DSCR Loan?
DSCR Loan has been gaining popularity in the property market including those of the rentals and real estate investment.
Beforehand, this type of loan was almost typically exclusive for business support only. This is the kind of financing that helps out startups and SMEs.
Later on, the potential seen in the ever expanding property market allowed the branching out of DSCR Loan application into this industry.
And here at Sprint Funding, every client or prospect is assured to have the lowest and most competitive mortgage financing.
DSCR Loan is a type of debt financing wherein the lender (cash flow lending bank or company) factors in the cash flow projection of a borrowing company or individual.
Here, the DSCR loan lender looks at the expected cash flow of the borrower and sometimes its past performance.
In the case of the property market, for example in rentals of a commercial building, the lender will examine the past rental income of the building, its current and future expenses like utilities, and its projected income.
From here, the DSCR lender will arrive at a decision on whether to grant a loan to the borrower including the amount to be given.
Important Components of DSCR Loan
Like any type of loan, the cash flow takes into consideration several pointers.
Usually, these components are universal in every bank or mortgage company such as here at Sprint Funding. The core goal of these components is to arrive at a positive cash flow.
Income is not your salary income as an employee but the projected profit and or value of the property in question.
In the rental market, this is the expected income or rental sales to be generated in a specific time, usually a year. If you are just starting, there are more considerations that you have to take.
Competition or market.You have to look at the existing market within your area so you do not go below or way above the range. This will be helpful in enticing renters.
Rental price per month.Knowing about the existing market will help determine the price or rental range of the property or units if many. Sometimes, this can be subjected to changes depending on the movement of the real estate market.
Expenses and Utilities
The projected income will be rated against the expenses and utilities of the property.
The usual expenses include but are not limited to basic utilities, mortgage (if you are still paying for the property), taxes, and even property management if you employ people to do it for you.
The interest will be determined by the lender from the evaluation of the property’s cash flow. In most cases, there is already an existing interest base or standard rate that applies to every borrower but this can also be situational or case-to-case basis.
In order to secure a DSCR loan, having a positive cash flow is needed. Think of it like a lender investing in your property.
The lender needs an assurance that it can get its investment back after a certain period of agreement. The great thing is, the agreement between the two parties can be very flexible. It can even be extended if agreed upon.
For example, let us look at Property A applying for this type loan.
For the most basic computational example, the cash flow needs to be known. Cash flow here is the difference between the expenses from the rental income.
If Property A has a monthly rental income of $5000 and collective expenses of $3000 (Mortgage $2000, Utilities $500, Others $500), the cash flow would be a positive value of $2000.
Property A Cash Flow = $5000 – $3000
Property A Cash Flow = $2000
Note that this is only a very basic computation of cash flow.
For a complete professional advice and consultation, don’t hesitate to send us a message.
Comparison with Asset Based Loan
Asset Based Loan like its name suggests is a type of debt financing that uses asset or property as collateral. Companies usually apply for this if they need additional investment money to operate or if they have plans for expansion.
In contrast, there is no asset or physical collateral needed in a DSCR loan. Your property is not placed in a situation where it can be taken by the lender.
The only powers you are going to give the lender are interest rates and partial control of your income.
This income is partially given to the lender in a given period of time depending on the agreement.
Basically, an asset based loan operates through asset collateral while a DSCR Loan operates through the cash flow of the borrower.